Chicken wing prices have plunged to pre-pandemic levels. Here's why that's great news for the stock market.

• Chicken wing prices have plunged to pre-pandemic levels, and that's great news for the stock market, according to Fundstrat.
• The research firm said any signs of deflation could show investors that inflation is not as sticky as some feared.
• "Inflation was the single biggest headwind for markets in 2022 and the inflection is the key to market recovery," Fundstrat said.

Plunging chicken wing prices are a good sign for the stock market as they show that inflation is easing, Fundstrat's Tom Lee said in a Friday note.

Chicken wing prices have fallen 62% from their peak to levels not seen since 2019. "That is not 'cooling' inflation... This is outright deflation. Prices falling to 2019 levels is a 3-year decline," Lee said.

The sharp drop in chicken prices could help convince investors that inflation is not as sticky as some have feared. If pricing for other goods and commodities follows the path of chicken wings, then it means the Federal Reserve has room to pivot away from its outsized interest rate hikes.

"Inflation was the single biggest headwind for markets in 2022 and the inflection is the key to market recovery," Lee explained.

In addition, it's not just chicken prices that are falling. The August Philly Fed manufacturing business outlook survey showed that prices paid and prices received both fell considerably from the prior month.

And perhaps most importantly, the housing market is showing signs of weakening with easing prices and slowing home sales.

"Similar to other data, [Redfin] data shows housing prices are weakening. This reflects the simple fact that with higher mortgage rates along with tighter lending and less certainty, selling prices need to decline," Lee said.

But this doesn't mean a repeat of the housing crash is upon us, according to Lee, as overall housing construction has been below long-term averages and represents a smaller chunk of the US economy than it did in 2008.

A cooling of the housing market without an outright collapse could make significant headway in taming inflation, as soaring home prices were the norm during the peak of the pandemic in 2020 and 2021.

"Cooling housing should lead to falling CPI. There is a lag, but... as housing cools, so will CPI related to housing," Lee said.

Ultimately, falling prices in everything from chicken wings to homes solidifies the idea that inflation has peaked and is set to continue lower in the ensuing months.

And that means the Fed could slow down its interest rate hikes, which would be a relief for stock prices and then some, as Lee thinks the S&P 500 could cruise to new record highs before year-end.